How do bonds effect the market?

Discussion in 'Trading' started by pumpkinhead, Jan 29, 2007.

  1. If bonds prices go up, then does the market usually go down?

    Same as when interest rates go up then the market goes down?
  2. piezoe


    Pumpkin, without boring you with details which you can easily find on the Web regarding the relationship between yield/interest rates and bond prices (they are inversely related, of course) Take a look at symbol TNX , the yield on the 10-year, vs. SPX the S&P 500. Plot them both on the same chart, and I think you will see very nicely how interest rates affect the stock market. You can also find out the "why" for this relationship on the web.

    Ultimately bond yields and prices respond to the same thing as equities, i.e., supply and demand. So, for example if no one wants bonds their yields must rise to make them more attractive, and the price of bonds already issued will drop, and if everyone wants them, the yields will drop and the price of bonds already issued will go up.

    So, when yields rise and the price of bonds drops, and if, at the same time, equities are viewed as being relatively expensive, money may flow from the market into bonds which are viewed as the better value vis a vis equities. That at least is more or less how things are supposed to work.
  3. I am sorry but isn't this part o the web, and isn't this website about trading. Your answer was like "the answer is out there, you just have to find it".
    Some links for the guy would be helpful to him rather than vague answers.
    No offense
  4. The interest rate is the intraday dynamic component which defines what the fair value is for all futures instruments and their corresponding underlying. Although the interest rate has a broad component that is related to the directionality of the underliers, it does nothing for the immediate short term except to arb out fair value differences. When treasuries spike, so does the fair value. However, it is quickly offset by the arbitragers bring the futures and underliers back into a pseudo equillibrium. Alot of traders watch treasury, but fail to relate how the rates are explicitly tied to an arbitrary future and it's cash equivalent. You want to stay on the right side of the fair value. This is where the directionality is buried and related to the interest rates for all futures contracts and corresponding cash underliers...
  5. piezoe


    Point well taken, Buzz, i added slightly more detail to my post, but still attempting to keep the response fairly simple.
  6. S&P went down at the same time the bond's had their auction at 1:00 EST. Now I see why the market went down all of a sudden - bonds go up then market goes down. I think...
  7. Along the lines of Makosgu's post:

    P = D (1 + g)/(r - g)

    P = share price (asset/underlying price)

    D = dividend or profit margin

    g = growth rate of dividend

    r = riskless rate of return --> directly proportional to interest rates and bonds.

    Hope this helps.

  8. Think about what the world revolves upon, credit and loans. Lower bond market prices lead to higher yields. Higher yields lead to greater loan payments across the entire spectrum.

    As a result all entities that take out a loan or have a line of credit will have a greater payment.

    This cuts into the buying power of the consumer, the margins of a business, etc. Its a disaster for homeowners or soon to be homeowners as they might have to deal with a higher mortgage payment. A person looking for a car might reconsider keeping their old one if the loan payment is too high. They might reconsider other discretionary purchases as well from TVs to computers to going to McDonalds. etc.
  9. I'm looking to buy a DVD on bond trading. I only found one and I'm not sure if it is what I'm looking for. I don't want to give the guy a plug here because he didn't return my email, but his initials are P.J.
    Does anybody know of any other DVD that teaches how to trade the bond market?
  10. I trade emini's using strategy runner and their charts. I don't think strategy runner has the TNX symbol. Thanks anyways.

    I plotted TNX and SPX on yahoo's new Java charts. It looks like they "Both" moved in the same direction today instead of opposite.
    #10     Jan 29, 2007